ISSUE BRIEF Updated SEPTEMBER 2019 How Will Medicaid Work Requirements Affect Hospitals’ Finances? Randy Haught Allen Dobson Joan DaVanzo Senior Data Manager Cofounder and President Chief Executive Officer Dobson | DaVanzo Dobson | DaVanzo Dobson | DaVanzo ABSTRACT TOPLINES ISSUE: The recent debate regarding Medicaid Section 1115 demonstration In states that impose work waivers that include work requirements has focused on potential loss of requirements for Medicaid, fewer covered beneficiaries coverage for Medicaid beneficiaries, but there has been little discussion of will mean reduced revenues the potential impact on providers that serve Medicaid patients. for hospitals, increases in their GOAL: To assess the potential financial impact on hospitals in states that uncompensated care costs, and smaller operating margins. have approved or pending Section 1115 demonstration waiver applications or bills that have been passed by state legislatures for implementing work Medicaid work requirements requirements in their Medicaid programs. may accelerate closures of rural METHODS: This brief updates our prior analysis (published March 2019) hospitals, many of which are already operating at a loss on on the financial impact that Medicaid work requirements may have patient care. on hospitals by incorporating results from a recent study of potential Medicaid coverage loss because of work requirements performed by Leighton Ku and Erin Brantley for the Commonwealth Fund, updated hospital financial data, and expanding our analysis to additional states that are considering implementing work requirements in Medicaid. KEY FINDINGS AND CONCLUSION: The results show that Medicaid work requirements could weaken hospitals’ financial positions, especially rural hospitals, in states that implement these requirements as a condition of coverage. However, the design of states’ Medicaid work requirement programs will play a key role in how many beneficiaries lose coverage and the resulting financial impact on hospitals. How Will Medicaid Work Requirements Affect Hospitals’ Finances?2 BACKGROUND Medicaid programs. This brief updates our prior analysis Much of the recent debate regarding Medicaid Section 1115 of the financial impact that Medicaid work requirements demonstration waivers that impose work requirements may have on hospitals. In this analysis, we use a study as a condition for eligibility has focused on potential loss of potential Medicaid coverage loss because of work of coverage for beneficiaries, but there has been little requirements, which estimated that 600,000 to 800,000 discussion about the impact on providers. In states that adults in nine states could lose Medicaid coverage because impose work requirements, Medicaid beneficiaries will of implementing work requirements.2 For the other lose health insurance coverage if they cannot find work, states included in this brief that were not covered in the are unable to document the required number of hours of abovementioned study, we used a similar methodology work activity, or cannot document an exemption. Their to estimate coverage losses. In addition, this updated loss of coverage will impact hospitals by reducing revenue brief expands our analysis to additional states that are and increasing uncompensated care costs. These adverse considering implementing work requirements in Medicaid. outcomes will not only affect the hospitals and Medicaid At the time of publication, nine states had received patients, but the entire community if hospitals must reduce approval, six states had submitted applications, and three staff or eliminate important services because of lower states had bills approved by their legislatures that would revenues and increased uncompensated care.1 require nondisabled adults to work a certain number In this brief, we examine the potential impact on hospitals of hours to receive Medicaid coverage.3 States with bills in states that have approved or pending Section 1115 that have been approved by the legislature have not yet waiver applications or bills that have been passed by state formally applied for a waiver nor have been approved. legislatures for implementing work requirements in their Exhibit 1 shows the status of these efforts. Exhibit 1. Medicaid Work Requirement Waivers: Application Status and Targeted Populations State Application status Targeted population Alabama Pending Traditional adults up to age 59 Arizona* Approved Expansion adults up to age 49 Arkansas* Approved Expansion adults up to age 49 Idaho* Bill approved in legislature Expansion adults up to age 49 Indiana* Approved Traditional and expansion adults up to age 59 Kentucky* Approved Traditional and expansion adults up to age 64 Michigan* Approved Expansion adults up to age 62 Mississippi Pending Traditional adults up to age 64 Montana* Bill approved in legislature Expansion adults up to age 55 Nebraska* Bill approved in legislature Expansion adults New Hampshire* Approved Expansion adults up to age 64 Ohio* Approved Expansion adults up to age 49 Oklahoma Pending Traditional adults up to age 50 South Dakota Pending Traditional adults up to age 59 Tennessee Pending Traditional adults up to age 64 Utah* Approved Expansion adults up to age 59 Virginia* Pending Traditional and expansion adults up to age 64 Wisconsin Approved Childless adults up to age 49 * States that expanded or plan to expand Medicaid under the Affordable Care Act. Data: “Status of Medicaid Expansion and Work Requirement Waivers,” Interactive, Commonwealth Fund, last updated July 31, 2019; and “Work Requirement Waivers: Approved and Pending as of August 21, 2019,” Medicaid Waiver Tracker: Approved and Pending Section 1115 Waivers by State, Henry J. Kaiser Family Foundation, Aug. 21, 2019. commonwealthfund.org Issue Brief, updated September 2019 How Will Medicaid Work Requirements Affect Hospitals’ Finances?3 Reductions in Medicaid coverage will have an impact on basic benefits package. However, enrollees will not lose hospitals by reducing Medicaid payments and increasing coverage for noncompliance. uncompensated care costs, which will result in lower Wisconsin’s project permits 48 months of work- hospital operating margins. How the work requirements are requirement noncompliance prior to losing coverage. As a designed will play a key role in how many beneficiaries lose coverage and the resulting financial impact on hospitals. result, coverage losses because of work requirements may not occur in the first year. The following analysis estimates the impact of Medicaid coverage loss on revenues, uncompensated care costs, and Exhibit 2 shows the estimated reductions in Medicaid operating margins for hospitals in the affected states. For revenues for acute care hospitals.4 We estimate that modeling purposes, we assume that work requirements Medicaid revenues will decline by 11 percent to 18 percent in all states are fully implemented in 2019. We present on average for hospitals in Kentucky and by 15 percent impact estimates under two scenarios: a low coverage to 23 percent for hospitals in Virginia (Exhibits 2 and loss assumption and a high coverage loss assumption. See 3). These two states apply work requirements to both “How We Conducted This Study” for details. traditional and expansion eligible beneficiaries up to age 64. In contrast, Arizona, Arkansas, Idaho, and Ohio will apply work requirements only to the expansion IMPACT ON MEDICAID REVENUES population up to age 49. We estimate that Medicaid The loss of Medicaid coverage because of implementing revenues will decline by a lesser degree (6% to 8%) for work requirements will have a significant impact on hospitals in these states. Medicaid revenues for hospitals in nearly all of the study states. However, the impact will vary across states because Across all 18 states, we estimate that Medicaid revenues of the design of the various work requirement programs. will decline by 8 percent to 12 percent on average. This Nine states (Arizona, Arkansas, Idaho, Michigan, would result in a decline in Medicaid payments to Montana, Nebraska, New Hampshire, Ohio, and Utah) hospitals of $2.2 billion to $3.1 billion in 2019 assuming target work requirements only to adult enrollees who that work requirements are fully implemented in that year. obtain eligibility through the ACA expansion. Indiana, Kentucky, and Virginia will apply work requirements to IMPACT ON UNCOMPENSATED CARE COSTS both the traditional Medicaid and expansion populations. Six states that did not expand Medicaid (Alabama, Most of the individuals losing Medicaid coverage will be Mississippi, Oklahoma, South Dakota, Tennessee, and ineligible for premium subsidies in the health insurance Wisconsin) will apply work requirements to adults marketplaces because their incomes will be below the in the traditional Medicaid program. All states have a federal poverty level (or below 138% of poverty for those maximum age limit that ranges from 49 to 64. Exemptions in expansion states).5 Many will be unemployed or have from the work requirements vary significantly by state, jobs that do not offer employer-sponsored insurance. but typically focus on enrollees who are medically frail, Therefore, many beneficiaries losing Medicaid coverage full-time students, or caregivers. will become uninsured and will contribute to rising hospital uncompensated care costs. Nebraska is proposing to implement a modified Medicaid expansion beginning in 2020 for adults with incomes A recent study on insurance coverage “churning” below 100 percent of the federal poverty level. In the among Medicaid beneficiaries nationally showed that second year of expansion, enrollees would need to nearly one-third of nonelderly Medicaid beneficiaries meet certain work requirements to receive an enhanced churned off Medicaid over a two-year period for various benefits package. Those that do not will receive only a reasons.6 Of those that left, about 74 percent became commonwealthfund.org Issue Brief, updated September 2019 How Will Medicaid Work Requirements Affect Hospitals’ Finances?4 Exhibit 2. Changes in Hospitals’ Medicaid Revenue in States Implementing Medicaid Work Requirements Assuming Full Implementation in 2019 Change in Medicaid revenue per hospital after implementation Percent change in of Medicaid work requirements Medicaid revenue per hospital Hospitals included Average Medicaid Low coverage High coverage Low coverage High coverage State in the analysis revenue per hospital loss estimate loss estimate loss estimate loss estimate Alabama 83 $7,972,878 –$681,346 –$830,391 –9% –10% Arizona* 59 $34,396,071 –$2,094,086 –$2,838,037 –6% –8% Arkansas* 68 $8,679,344 –$588,718 –$672,820 –7% –8% Idaho* 37 $15,709,008 –$1,044,676 –$1,325,935 –7% –8% Indiana* 113 $15,659,099 –$923,171 –$1,532,813 –6% –10% Kentucky* 89 $28,251,815 –$3,241,357 –$5,125,866 –11% –18% Michigan* 118 $33,878,969 –$3,706,164 –$4,642,667 –11% –14% Mississippi 86 $13,893,303 –$844,916 –$1,332,368 –6% –10% Montana* 51 $10,297,736 –$764,795 –$970,701 –7% –9% Nebraska* 69 $6,463,886 n/a n/a n/a n/a New Hampshire* 26 $14,393,675 –$1,743,127 –$2,672,794 –12% –19% Ohio* 151 $26,754,820 –$1,656,356 –$2,231,290 –6% –8% Oklahoma 98 $11,215,348 –$737,970 –$936,655 –7% –8% South Dakota 48 $3,995,151 –$256,842 –$321,052 –6% –8% Tennessee 98 $21,552,278 –$2,397,302 –$3,780,361 –11% –18% Utah* 45 $19,776,265 –$696,752 –$1,184,479 –4% –6% Virginia* 73 $30,015,499 –$4,450,453 –$7,018,021 –15% –23% Wisconsin 119 $14,205,821 n/a n/a n/a n/a Average: 18 states 1,431 $18,797,299 –$1,517,705 –$2,181,848 –8% –12% * States that expanded or plan to expand Medicaid under the Affordable Care Act. n/a: We do not anticipate Medicaid coverage losses in the first year of the programs in Nebraska and Wisconsin because of the design of their programs. ExhibitDobson | DaVanzo simulation of the impact of Medicaid work requirements on hospitals using the Hospital Financial Simulation Model and Medicare Hospital Cost Data: 3 Report data; includes acute care hospitals that reported required Medicare hospital cost report data in 2017. Percent Changes in Hospitals’ Medicaid Revenue in States Implementing Medicaid Work RequirementsMedicaid Revenue in States Implementing Medicaid Work Exhibit 3. Percent Changes in Hospitals’ Assuming Full Implementation in 2019 Midpoint of high and low coverage loss estimates (midpoint of high and low coverage loss estimates) Requirements Assuming Full Implementation in 2019 -9.5% Alabama -7.2% Arizona* -7.3% Arkansas* -7.5% Idaho* -7.8% Indiana* -14.8% Kentucky* -12.3% Michigan* -7.8% Mississippi -8.4% Montana* n/a Nebraska* -15.3% New Hampshire* -7.3% Ohio* -7.5% Oklahoma -7.2% South Dakota -14.3% Tennessee -4.8% Utah* -19.1% Virginia* n/a Wisconsin * States that expanded or plan to expand Medicaid under the Affordable Care Act. n/a: We do not anticipate Medicaid coverage losses in the first year of the programs in Nebraska and Wisconsin because of the design of their programs. Data: Dobson | DaVanzo simulation of the impact of Medicaid work requirements on hospitals using the Hospital Financial Simulation Model and Medicare Hospital Cost Report data; includes acute care hospitals that reported required Medicare hospital cost report data in 2017. * States that expanded or plan to expand Medicaid under the Affordable Care Act. commonwealthfund.org Issue Brief, updated September 2019 n/a: We do not anticipate Medicaid coverage losses in the first year of the programs in Nebraska and Wisconsin because of the design of their programs. Data: Dobson | DaVanzo simulation of the impact of Medicaid work requirements on hospitals using the Hospital Financial Simulation Model and Medicare Hospital Cost Report data; includes acute care hospitals that reported required Medicare hospital cost report data in 2017. How Will Medicaid Work Requirements Affect Hospitals’ Finances?5 permanently or temporarily uninsured. Many individuals states that expanded Medicaid will experience the largest that experienced a temporary uninsured period later increases in uncompensated care in both dollar amounts reenrolled in Medicaid. However, Medicaid beneficiaries per hospital and in terms of percentage increases. This who lose coverage because of work requirements may be is because there will be a larger proportion of Medicaid “locked out” of reenrolling for a certain time period. For beneficiaries losing coverage in expansion states. In example, under Arkansas’ waiver, enrollees lose coverage addition, hospitals in expansion states have benefited for the remainder of the calendar year after not meeting from reduced uncompensated care costs, a benefit which the work requirements for any three months and cannot will now be undone. Hospitals in Kentucky could see the reapply until the following January. Even after the lock-out largest uncompensated care increases from implementing period, these individuals will need to prove they are work requirements, as the condition will apply to both working the required number of hours to regain coverage. traditional and expansion populations up to age 64. As a result, a large portion will be permanently uninsured Across all 18 states, we estimate that uncompensated care and others will have extended gaps in coverage. This costs will increase by 15 percent to 29 percent, on average. increases hospital uncompensated care costs.7 This would result in an increase in uncompensated care Exhibits 4 and 5 show the estimated increase costs for hospitals of $1.5 billion to $2.8 billion in 2019 in uncompensated care costs per hospital from assuming that work requirements are fully implemented in implementing Medicaid work requirements. Hospitals in that year. Exhibit 4. Changes in Hospitals’ Uncompensated Care Costs in States Implementing Medicaid Work Requirements Assuming Full Implementation in 2019 Change in uncompensated care cost Percent change in per hospital after implementation of uncompensated care cost Medicaid work requirements per hospital Hospitals Average included in uncompensated care Low coverage High coverage Low coverage High coverage State the analysis cost per hospital loss estimate loss estimate loss estimate loss estimate Alabama 83 $8,756,229 $564,956 $918,054 6% 10% Arizona* 59 $7,522,641 $1,710,046 $3,090,083 23% 41% Arkansas* 68 $3,424,678 $378,298 $576,454 11% 17% Idaho* 37 $4,118,281 $630,913 $1,067,699 15% 26% Indiana* 113 $6,954,665 $681,093 $1,507,828 10% 22% Kentucky* 89 $4,192,297 $2,068,169 $4,360,790 49% 104% Michigan* 118 $5,165,543 $2,535,661 $4,235,189 49% 82% Mississippi 86 $7,535,751 $418,268 $879,435 6% 12% Montana* 51 $1,796,157 $381,020 $644,804 21% 36% Nebraska* 69 $2,493,289 n/a n/a n/a n/a New Hampshire* 26 $5,653,714 $1,230,867 $2,516,439 22% 45% Ohio* 151 $9,133,404 $1,288,287 $2,313,947 14% 25% Oklahoma 98 $8,107,382 $404,988 $685,365 5% 8% South Dakota 48 $2,343,785 $173,269 $288,781 7% 12% Tennessee 98 $11,893,261 $1,486,463 $3,125,383 12% 26% Utah* 45 $8,097,366 $308,467 $699,192 4% 9% Virginia* 73 $13,077,460 $2,928,455 $6,157,263 22% 47% Wisconsin 119 $3,409,100 n/a n/a n/a n/a Average: 18 states 1,431 $6,680,309 $1,020,520 $1,947,640 15% 29% * States that expanded or plan to expand Medicaid under the Affordable Care Act. n/a: We do not anticipate Medicaid coverage losses in the first year of the programs in Nebraska and Wisconsin because of the design of their programs. Data: Dobson | DaVanzo simulation of the impact of Medicaid work requirements on hospitals using the Hospital Financial Simulation Model and Medicare Hospital Cost Report data; includes acute care hospitals that reported required Medicare hospital cost report data in 2017. commonwealthfund.org Issue Brief, updated September 2019 How Will Medicaid Work Requirements Affect Hospitals’ Finances?6 Exhibit 5 Percent Changes in Hospitals’ Uncompensated Care Cost in States Implementing Medicaid Work Requirements Assuming Full Implementation in 2019 Exhibit 5. Percent Changes in Hospitals’ Uncompensated Care Costs in States Implementing Medicaid Work Requirements Assuming Full Implementation in 2019 (midpoint of high and low Midpoint of high and low coverage loss estimates coverage loss estimates) Alabama 8.5% Arizona* 31.9% Arkansas* 13.9% Idaho* 20.6% Indiana* 15.7% Kentucky* 76.7% Michigan* 65.5% Mississippi 8.6% Montana* 28.6% Nebraska* n/a New Hampshire* 33.1% Ohio* 19.7% Oklahoma 6.7% South Dakota 9.9% Tennessee 19.4% Utah* 6.2% Virginia* 34.7% Wisconsin n/a * States that expanded or plan to expand Medicaid under the Affordable Care Act. n/a: We do not anticipate Medicaid coverage losses in the first year of the programs in Nebraska and Wisconsin because of the design of their programs. Data: Dobson | DaVanzo simulation of the impact of Medicaid work requirements on hospitals using the Hospital Financial Simulation Model and Medicare Hospital Cost Report data;expanded or plan to expand Medicaid under the Affordable Care Act. hospital cost report data in 2017. * States that includes acute care hospitals that reported required Medicare n/a: We do not anticipate Medicaid coverage losses in the first year of the programs in Nebraska and Wisconsin because of the design of their programs. Data: Dobson | DaVanzo simulation of the impact of Medicaid work requirements on hospitals using the Hospital Financial Simulation Model and Medicare Hospital Cost Report data; includes acute care hospitals that reported required Medicare hospital cost report data in 2017. IMPACT ON HOSPITAL OPERATING MARGINS How Will Medicaid Work Requirements Affect Hospitals’ Finances? (Commonwealth Fund, Sept. 2019). Source: Randy Haught, Allen Dobson, and Joan DaVanzo, IMPACT ON RURAL HOSPITAL OPERATING The reduction in Medicaid revenues and increases in MARGINS uncompensated care costs will lead to reduced operating Rural hospitals may be adversely impacted by work margins for hospitals in states that implement Medicaid requirements relative to hospitals located in urban areas.9 work requirements.8 Exhibits 6 and 7 show the estimated Rural hospitals are projected to have negative operating changes in hospital operating margins by state. For margins, on average, and lower operating margins than urban hospitals in most of these states prior to example, we estimate that hospital operating margins in implementation of work requirements, meaning they are Alabama hospitals will be –3.7 percent in 2019 without already operating at a loss on patient care (Exhibit 8). Medicaid work requirements. Implementing work requirements in the state would reduce margins by Implementing work requirements will further reduce an additional 0.2 to 0.4 percentage points, resulting in operating margins for these already struggling hospitals. margins of –3.9 percent to –4.1 percent. Hospitals in rural communities have recently been closing at an alarming rate. Since 2010, 113 rural hospitals have To put operating margin impacts into dollar terms, we closed in the U.S.; a reduction in operating margins may estimate that hospital operating income — defined as net intensify the issue.10 Nearly a quarter of rural hospitals patient revenues less operating expenses — for hospitals nationwide are near insolvency. An analysis of 2,045 rural across the 18 states could decline by $0.8 billion to $2.0 hospitals nationwide showed that 21 percent across 43 billion in 2019 assuming that work requirements are fully states are at a high risk of closing unless their financial implemented in that year. situations improve.11 commonwealthfund.org Issue Brief, updated September 2019 How Will Medicaid Work Requirements Affect Hospitals’ Finances?7 Exhibit 6. Changes in Hospitals’ Operating Margins in States Implementing Medicaid Work Requirements Assuming Full Implementation in 2019 Change in hospital operating margins after implementation of Medicaid work requirements Hospitals included Average hospital Low coverage High coverage State in the analysis operating margin loss estimate loss estimate Alabama 83 –3.7% –0.2% –0.4% Arizona* 59 2.8% –0.1% –0.6% Arkansas* 68 0.0% –0.2% –0.4% Idaho* 37 2.1% –0.3% –0.6% Indiana* 113 5.8% –0.1% –0.5% Kentucky* 89 –3.2% –0.8% –2.2% Michigan* 118 –4.0% –0.6% –1.2% Mississippi 86 –3.0% –0.5% –1.1% Montana* 51 –1.3% –0.6% –1.0% Nebraska* 69 –7.0% n/a n/a New Hampshire* 26 1.9% –0.2% –0.8% Ohio* 151 –0.5% –0.1% –0.5% Oklahoma 98 1.1% –0.3% –0.6% South Dakota 48 1.0% –0.1% –0.2% Tennessee 98 –3.1% –0.5% –1.3% Utah* 45 12.2% –0.2% –0.4% Virginia* 73 4.1% –0.4% –1.4% Wisconsin 119 1.2% n/a n/a Average: 18 states 1,431 0.2% –0.3% –0.7% * States that expanded or plan to expand Medicaid under the Affordable Care Act. n/a: We do not anticipate Medicaid coverage losses in the first year of the programs in Nebraska and Wisconsin because of the design of their programs. Data: Dobson | DaVanzo simulation of the impact of Medicaid work requirements on hospitals using the Hospital Financial Simulation Model and Medicare Hospital Cost Exhibit 7 Report data; includes acute care hospitals that reported required Medicare hospital cost report data in 2017. Percent Changes in Hospitals’ Operating Margins in States Implementing Medicaid Work Requirements Assuming Full Implementation in 2019 Exhibit 7. Percent Changes in Hospitals’ Operating Margins in States Implementing Medicaid Work Requirementshigh and low coverage loss estimates Midpoint of Assuming Full Implementation in 2019 (midpoint of high and low coverage loss estimates) -0.3% Alabama -0.3% Arizona* -0.3% Arkansas* -0.4% Idaho* -0.3% Indiana* -1.5% Kentucky* -0.9% Michigan* -0.8% Mississippi -0.8% Montana* n/a Nebraska* -0.5% New Hampshire* -0.3% Ohio* -0.4% Oklahoma -0.2% South Dakota -0.9% Tennessee -0.3% Utah* -0.9% Virginia* n/a Wisconsin * States that expanded or plan to expand Medicaid under the Affordable Care Act. n/a: We do not anticipate Medicaid coverage losses in the first year of the programs in Nebraska and Wisconsin because of the design of their programs. Data: Dobson | DaVanzo simulation of the impact of Medicaid work requirements on hospitals using the Hospital Financial Simulation Model and Medicare Hospital Cost Report data; includes acute care hospitals that reported required Medicare hospital cost report data in 2017. * States that expanded or plan to expand Medicaid under the Affordable Care Act. commonwealthfund.org n/a: We do not anticipate Medicaid coverage losses in the first year of the programs in Nebraska and Wisconsin because of the design of their programs. Brief, updated September 2019 Issue Data: Dobson | DaVanzo simulation of the impact of Medicaid work requirements on hospitals using the Hospital Financial Simulation Model and Medicare Hospital Cost Report data; includes acute care hospitals that reported required Medicare hospital cost report data in 2017. How Will Medicaid Work Requirements Affect Hospitals’ Finances?8 Exhibit 8. Changes in Hospitals’ Operating Margins by Urban/Rural Location in States Implementing Medicaid Work Requirements Assuming Full Implementation in 2019 Rural hospitals Urban hospitals Average hospital Average hospital Average hospital Average hospital Hospitals operating margin operating margin Hospitals operating margin operating margin included in before work after work included in before work after work State the analysis requirements requirements the analysis requirements requirements Alabama 42 –8.6% –8.8% to –9.1% 41 –2.9% –3.0% to –3.2% Arizona* 26 0.3% 0.1% to –0.3% 33 4.9% 4.9% to 4.4% Arkansas* 46 –4.5% –4.9% to –5.1% 22 1.9% 1.7% to 1.5% Idaho* 28 –2.9% –3.3% to –3.6% 9 3.9% 3.7% to 3.4% Indiana* 42 –5.5% –5.6% to –5.9% 71 7.7% 7.6% to 7.3% Kentucky* 66 –1.9% –2.7% to –4.3% 23 –4.0% –4.8% to –6.1% Michigan* 65 –3.3% –3.8% to –4.4% 53 –4.2% –4.8% to –5.5% Mississippi 63 –4.7% –5.2% to –5.8% 23 –1.5% –2.0% to –2.6% Montana* 46 –3.1% –3.6% to –4.0% 5 1.4% 0.8% to 0.4% Nebraska* 58 –2.1% n/a 11 –10.6% n/a New Hampshire* 18 –4.0% –4.2% to –4.8% 8 9.7% 9.5% to 8.9% Ohio* 61 0.3% 0.3% to –0.2% 90 –0.7% –0.8% to –1.2% Oklahoma 56 –5.1% –5.5% to –5.8% 42 3.0% 2.7% to 2.5% South Dakota 40 –4.6% –4.7% to –4.8% 8 4.9% 4.8% to 4.6% Tennessee 51 –3.9% –4.5% to –5.2% 47 –2.8% –3.3% to –4.1% Utah* 20 9.2% 9.0% to 8.8% 25 12.5% 12.3% to 12.1% Virginia* 23 3.3% 2.7% to 1.6% 50 4.3% 3.8% to 2.8% Wisconsin 74 –2.5% n/a 45 3.2% n/a Average: 18 states 825 –2.4% –2.7% to –3.2% 606 1.2% 0.9% to 0.4% * States that expanded or plan to expand Medicaid under the Affordable Care Act. n/a: We do not anticipate Medicaid coverage losses in the first year of the programs in Nebraska and Wisconsin because of the design of their programs. Data: Dobson | DaVanzo simulation of the impact of Medicaid work requirements on hospitals using the Hospital Financial Simulation Model and Medicare Hospital Cost Report data; includes acute care hospitals that reported required Medicare hospital cost report data in 2017. Most states that are planning to implement work DISCUSSION requirements expanded Medicaid under the ACA. The This analysis was based on a recent study of Medicaid Medicaid expansion was associated with improved coverage losses because of implementing work hospital financial performance and substantially lower requirements in nine states with approved Medicaid likelihoods of closure, especially in rural markets and waivers.13 It shows that Medicaid work requirements may counties with large numbers of uninsured adults before weaken hospitals’ financial positions but will impact Medicaid expansion.12 Implementing work requirements hospitals’ operating margins differently across states. may undo many of the benefits of Medicaid expansion realized by rural hospitals. Several factors help to explain these differences: We estimate that operating income — defined as net • Hospital payer mix. Hospitals in states that have patient revenues less operating expenses — for rural a high Medicaid payer mix are more dependent on hospitals across the 18 states could decline by $215 million Medicaid revenues and will be adversely affected to $545 million in 2019 assuming that work requirements more than hospitals in states with a lower Medicaid are fully implemented in that year. payer mix. commonwealthfund.org Issue Brief, updated September 2019 How Will Medicaid Work Requirements Affect Hospitals’ Finances?9 • Medicaid enrollees subject to work requirements Additional research is also needed to explore whether and those that lose coverage. States that subject Medicaid enrollees that lose coverage will be able to obtain a large portion of enrollees to work requirements, other insurance coverage or will become uninsured. Much by setting higher age limits and applying work of the current research regarding churning in Medicaid requirements to both traditional and expansion indicates that most people who lose coverage experience groups, will experience a greater negative impact permanent coverage loss or significant gaps in coverage. If than other states. Hospitals in Kentucky, for instance, a high percentage of Medicaid enrollees that lose coverage will be adversely impacted because of the design of because of work requirements are unable to obtain the program, which applies work requirements to private insurance coverage, this also will increase the both traditional and expansion eligible beneficiaries uncompensated care burden for hospitals. up to age 64. The improved financial stability experienced by many • Portion of Medicaid enrollees that become hospitals following the ACA coverage expansion has uninsured. If a large portion of enrollees that lose allowed them to hire new staff and maintain or offer Medicaid coverage are unable to obtain private new services to their communities. The improvements coverage, hospital uncompensated care costs will in hospital finances may be jeopardized if the Medicaid increase and operating margins will decline. coverage losses experienced by Arkansas are seen in other states. While the estimates provided by Ku and Brantley are extremely helpful for understanding the program’s This adverse financial impact will not only affect hospitals impact on Medicaid coverage, more research is needed and Medicaid patients but the entire surrounding to understand the risk profile of Medicaid beneficiaries communities. This may be especially critical for rural who lose coverage. Enrollees with disabilities or with communities. Since many rural hospitals already health conditions that keep them from working have experience negative operating margins, the increased substantially higher costs than the average Medicaid pressure of further reducing Medicaid revenue and beneficiary. If even some of these individuals fall through increasing uncompensated care could exacerbate the cracks, it could have a significant impact on hospitals’ closures. Closing a hospital has rippling effects through uncompensated care. While most states plan to exempt the community, particularly if it is the only one in the people deemed “medically frail,” it’s likely that many community. It has an effect on emergency and physician people with disabilities won’t qualify for an exemption or care. When a hospital closes, many physicians relocate to will be unable to prove that they do. another hospital or leave the area. In addition, economic effects are felt immediately, with per capita income falling and the unemployment rate rising.14 commonwealthfund.org Issue Brief, updated September 2019 How Will Medicaid Work Requirements Affect Hospitals’ Finances?10 HOW WE CONDUCTED THIS STUDY This brief updates our prior analysis (published March 2019) are planning to implement expansion in 2020. We then on the financial impact that Medicaid work requirements estimated the number of enrollees that would meet the may have on hospitals using a recent study by Ku and age criteria for each state’s work requirement program Brantley of potential Medicaid coverage loss because of based on national age distribution of nondisabled work requirements,15 updated hospital financial data, and Medicaid adults. We obtained high- and low-range an expanded analysis to include additional states that are Medicaid coverage loss percentage estimates from Ku considering implementing work requirements in Medicaid. and Brantley for states with similar populations subjected The Ku and Brantley study estimated Medicaid coverage to work requirements. The coverage loss percentages losses to be lower than those used in our prior analysis, were multiplied by the estimated number of enrollees which in effect reduces the impact on hospitals as compared subjected to work requirements to obtain Medicaid to our prior brief. coverage loss estimates for these additional states. This analysis uses the Dobson | DaVanzo Hospital Finance 3. An important factor for providers will be the health Simulation Model (HFSM) to produce estimates of the care utilization or risk profile of Medicaid beneficiaries financial impact of Medicaid work requirements on hospitals. that lose coverage. Our analysis of the national Medical The model is built using 2017 Medicare Hospital Cost Expenditure Panel Survey (MEPS) data for 2015 found Reports (MCRs) as the primary data source. This data source that hospital spending for working Medicaid nonelderly allows us to determine revenues and expenses by payer (i.e., adults is about 16 percent less costly than the average Medicare, Medicaid, other government payers, and all other Medicaid enrollee, and nonworking adults that would payers) for each U.S. hospital. Hospital revenues and costs not meet the criteria for a potential exemption are for each payer category were projected from 2017 through 52 percent less costly. However, enrollees that could 2027 based on trends in population growth, utilization, potentially meet one of the exemptions are substantially service intensity, and medical inflation. more costly than the average Medicaid enrollee. While most states plan to exempt people deemed “medically HFSM uses these data and applies assumptions about the frail,” it is likely that many people with disabilities won’t impact of Medicaid work requirements on coverage loss qualify for an exemption or will be unable to prove that within each state. The model then incorporates dynamics of they do. how the assumptions impact hospital utilization, costs, and revenues. Coverage loss assumptions were developed using 4. Finally, we estimated the number of individuals losing the following steps: Medicaid coverage who will become uninsured. A recent study on insurance coverage “churning” among 1. We first simulated the impact of Medicaid expansion on Medicaid beneficiaries nationally found that about 63 hospitals’ Medicaid revenues and uncompensated care percent of people losing Medicaid coverage would costs for hospitals in Idaho, Nebraska, Utah, and Virginia. become permanently uninsured and the remaining 37 Since these states did not expand Medicaid until 2019 percent would experience a gap in insurance coverage (Utah and Virginia) and 2020 (Idaho and Nebraska), of about four months over the 24-month study period.17 the effect of Medicaid expansion is not reflected in the This would result in about 69 percent (63% + 37% x 2017 hospital financial data used for this analysis. For (4/24)) of people who lose Medicaid coverage because modeling simplification purposes, we assumed that of work requirements would be uninsured at any Medicaid expansion is fully implemented in these four given point in time. We applied this assumption to the states in 2019 in order to estimate and present results of low-range Medicaid coverage loss estimate in order work requirement impacts for all states in 2019. to present a low-range health insurance coverage loss 2. We used range estimates of Medicaid coverage loss estimate. because of implementing work requirements in 5. Another recent study of the impact on enrollees of the nine states with approved Medicaid waivers from Ku suspension of the Tennessee adult Medicaid expansion and Brantley.16 For the other nine states in our study found no evidence that adults who lost Medicaid that were not included in the Ku and Brantley study, coverage gained private insurance. Therefore, as a we incorporated a similar methodology to estimate high-range estimate, we assume that nearly all people coverage losses in these states. This was accomplished who lose their Medicaid coverage because of work by obtaining data from state websites on the number requirements would become uninsured. We applied of Medicaid enrollees in specified eligibility categories this assumption to the high-range Medicaid coverage or state’s estimates of expansion enrollment for states loss estimate in order to present a high-range health that have recently implemented Medicaid expansion or insurance coverage loss estimate. commonwealthfund.org Issue Brief, updated September 2019 How Will Medicaid Work Requirements Affect Hospitals’ Finances?11 NOTES 1. The estimated impact on hospital operating margins 8. Hospitals operating margins were calculated as (net presented in this report are meant to illustrate the patient revenues – operating expenses) / net patient financial pressure on hospitals because of reduced revenues. Operating margin measures hospitals’ Medicaid revenue and increased uncompensated care profitability on the income or losses derived from costs because of Medicaid work requirements. However, patient care. An operating margin of 2 percent means hospital managers will react to the pressures identified that each dollar of patient revenues generates two cents in our study to remain financially viable, which may in profits. Operating margin is often a better measure of include: reducing costs through labor or wage reductions; a hospital’s sustainable profitability than total hospital eliminate unprofitable service lines; lower the amount margins because it focuses on revenue from patient care of charity care delivered; and/or seek increased payment as opposed to income from other less dependable sources, from private insurers. such as investment income. See also Note 1 above. 2. Leighton Ku and Erin Brantley, “Medicaid Work 9. Rural hospitals are defined as hospitals physically Requirement in Nine States Could Cause 600,000 to located in a state and county that is not designated as a 800,000 Adults to Lose Medicaid Coverage,” To the Point Core Based Statistical Area by the Office of Management (blog), Commonwealth Fund, June 21, 2019. and Budget at the beginning of the hospitals’ 2016 Medicare cost-reporting period. 3. “Status of Medicaid Expansion and Work Requirement Waivers,” Interactive, Commonwealth Fund, last updated 10. University of North Carolina, Cecil G. Sheps Center for July 31, 2019; and “Work Requirement Waivers: Approved Health Services Research, “155 Rural Hospital Closures: and Pending as of August 21, 2019,” Medicaid Waiver January 2015–Present,” UNC Sheps Center, n.d. Tracker: Approved and Pending Section 1115 Waivers by 11. David Mosley and Daniel DeBehnke, Rural Hospital State, Henry J. Kaiser Family Foundation, Aug. 21, 2019. Sustainability: New Analysis Shows Worsening Situation for 4. Medicaid revenues include payment received for Rural Hospitals (Navigant Research, Feb. 2019). all covered inpatient and outpatient services except 12. Richard C. Lindrooth et al., “Understanding the physician or other professional services, also include Relationship Between Medicaid Expansions and Hospital payments received from Medicaid managed care plans Closures,” Health Affairs 37, no. 1 (Jan. 2018): 111–20. and disproportionate share hospital and supplemental payments, net of associated provider taxes or assessments. 13. Ku and Brantley, “Medicaid Work Requirement,” 2019. 5. Henry J. Kaiser Family Foundation, Explaining Health 14. George M. Holmes et al., “The Effect of Rural Hospital Care Reform: Questions About Health Insurance Subsidies Closures on Community Economic Health,” Health (KFF, Nov. 2018). Services Research 41, no. 2 (Apr. 2006): 467–85. 6. Sara R. Collins, Sherry A. Glied, and Adlan Jackson, 15. Ku and Brantley, “Medicaid Work Requirement,” 2019. The Potential Implications of Work Requirements for the Insurance Coverage of Medicaid Beneficiaries: The Case of 16. Ku and Brantley, “Medicaid Work Requirement,” 2019. Kentucky (Commonwealth Fund, Oct. 2018). 17. Collins, Glied, and Jackson, Potential Implications, 2018. 7. Uncompensated care costs were defined as charity care costs net of partial payments by patients plus non-Medicare and Medicare nonreimbursable bad debt costs. commonwealthfund.org Issue Brief, updated September 2019 How Will Medicaid Work Requirements Affect Hospitals’ Finances?12 ABOUT THE AUTHORS Randy Haught is a senior data manager at Dobson | Joan DaVanzo, Ph.D., is chief executive officer of DaVanzo and brings nearly 30 years of experience Dobson | DaVanzo, a woman-owned health economics performing analyses of major health care reform consulting firm. Dr. DaVanzo leads several projects for the legislation and provider payment regulations. While at Centers for Medicare and Medicaid Services, including Dobson | DaVanzo, Mr. Haught has worked for a number an evaluation of the Medicare IVIG Demonstration. of organizations to assist them with developing or Prior to cofounding the firm, Dr. DaVanzo served as vice examining Medicare alternative payment models. Prior president at the Lewin Group for nearly a decade, where to joining Dobson | DaVanzo, Mr. Haught spent more than she specialized in Medicare policy analysis and aging. 20 years with the Lewin Group where he focused on data Her work focused on health service utilization among analysis and microsimulation modeling of health care Medicare beneficiaries and Medicare provider payment financing and policy related issues. Mr. Haught was the methodology. Prior experience also includes work at the architect of the Lewin Group’s Health Benefit Simulation RAND Corporation on an evaluation of the CHAMPUS model, which was used to estimate the impacts of major program and at the University of California, Los Angeles, health care reform proposals and most recently the on a Medicare demonstration project to determine the Affordable Care Act (ACA). Mr. Haught graduated with cost-effectiveness of providing preventive health care to honors in Mathematics from Waynesburg College. Medicare beneficiaries. Dr. DaVanzo earned an M.S.W. from New York University, and her Ph.D. in Public Health Allen Dobson, Ph.D., is cofounder and president of from the University of California, Los Angeles, where she Dobson | DaVanzo. Over the past several years, Dr. Dobson was a Pew Health Policy Program fellow. has studied Medicare’s Prospective Payment Systems (PPS) and Physician Payment System and has led efforts to model the impact of physician and hospital payment Editorial support was provided by Deborah Lorber. policies upon stakeholders using microsimulation and econometric techniques. He also led a series of state ACKNOWLEDGMENTS Medicaid studies. Dr. Dobson developed estimates for The authors thank Leighton Ku and Erin Brantley of the the Institute of Medicine Committee on Medicare Benefit Milken Institute School of Public Health at the George Extensions of the likely cost to Medicare of expanding Washington University and Melinda Abrams and Sara preventive benefits. Before cofounding Dobson | DaVanzo, Collins of the Commonwealth Fund for their support of Dr. Dobson was a senior vice president at the Lewin this project. Group. Prior to that, he was director of the Office of Research at the Health Care Financing Administration during the period that Medicare PPS was developed and For more information about this brief, please contact: implemented. Dr. Dobson earned his Ph.D. in Economics Randy Haught from Washington University in St. Louis. Senior Data Manager Dobson | DaVanzo randy.haughtdobsondavanzo.com commonwealthfund.org Issue Brief, updated September 2019 About the Commonwealth Fund The mission of the Commonwealth Fund is to promote a high-performing health care system that achieves better access, improved quality, and greater efficiency, particularly for society’s most vulnerable, including low-income people, the uninsured, and people of color. Support for this research was provided by the Commonwealth Fund. The views presented here are those of the authors and not necessarily those of the Commonwealth Fund or its directors, officers, or staff.